Does di­vest­ment work?

Nairobi Law Monthly - - Analysis -

Be­gin­ning in the early nine­teeneight­ies, stu­dents on col­lege cam­puses across the U.S. de­manded that their univer­si­ties stop in­vest­ing in com­pa­nies that con­ducted busi­ness in South Africa, in protest of the apartheid sys­tem. As an ex­am­ple of so­cial ac­tivism, the cam­paign was a phe­nom­e­nal suc­cess: by the end of the decade, about a hun­dred and fifty ed­u­ca­tional in­sti­tu­tions had di­vested. But did the cam­paign suc­ceed in pres­sur­ing the South African govern­ment to dis­man­tle apartheid? The an­swer is less ob­vi­ous than you might think.

The econ­o­mists Siew Hong Teoh, Ivo Welch, and C. Paul Waz­zan stud­ied how U.S. di­vest­ment move­ments af­fected the South African fi­nan­cial mar­ket and the share prices of US com­pa­nies with South African op­er­a­tions. Di­vest­ments were ex­pected, on av­er­age, to de­crease share prices, but the study found that, in fact, political pres­sure turned out to have no dis­cernible ef­fect on the shares' pub­lic mar­ket val­u­a­tions. Ac­cord­ing to the au­thors, a pos­si­ble ex­pla­na­tion of this find­ing is that “the boy­cott pri­mar­ily re­al­lo­cated shares and op­er­a­tions from ‘so­cially re­spon­si­ble' to more in­dif­fer­ent in­vestors and coun­tries.”

Al­though con­tem­po­rary di­vest­ment cam­paigns have the po­ten­tial to do a lot of good, we need to be clear about what their path to im­pact might be. Di­vest­ment is an ex­am­ple of so­cially re­spon­si­ble in­vest­ing—the prac­tice of ei­ther in­vest­ing only in so­cially valu­able com­pa­nies or, more com­monly, re­fus­ing to in­vest in com­pa­nies that are deemed “un­eth­i­cal.” So­cially re­spon­si­ble in­vest­ing is big: ac­cord­ing to a 2014 re­port by the Fo­rum for Sus­tain­able and Re­spon­si­ble In­vest­ment, roughly one in six dol­lars, or about eigh­teen per cent, of the $36.8 tril­lion in pro­fes­sion­ally man­aged as­sets in the U.S. is in­volved in so­cially re­spon­si­ble in­vest­ing. And the move­ment has ex­ploded in the past two decades. Stu­dents are lob­by­ing their univer­si­ties to di­vest from morally du­bi­ous in­dus­tries, such as to­bacco or firearms. More re­cently, a coali­tion of two thou­sand in­di­vid­u­als—in­clud­ing celebri­ties like Leonardo Dicaprio—and four hun­dred in­sti­tu­tions worth $2.6 tril­lion has pledged to di­vest from fos­sil-fuel com­pa­nies.

How­ever, if the aim of di­vest­ment cam­paigns is to re­duce com­pa­nies' prof­itabil­ity by di­rectly re­duc­ing their share prices, then th­ese cam­paigns are mis­guided. An ex­am­ple: sup­pose that the mar­ket price for a share in Exxonmo­bil is ten dol­lars, and that, as a re­sult of a di­vest­ment cam­paign, a univer­sity de­cides to di­vest from Exxonmo­bil, and it sells the shares for nine dol­lars each. What hap­pens then?

Well, what hap­pens is that some­one who doesn't have eth­i­cal con­cerns will snap up the bar­gain. They'll buy the shares for nine dol­lars apiece, and then sell them for ten dol­lars to one of the other thou­sands of in­vestors who don't share the univer­sity's moral scru­ples. The mar­ket price stays the same; the com­pany loses no money and no­tices no dif­fer­ence. As long as there are eco­nomic in­cen­tives to in­vest in a cer­tain stock, there will be in­di­vid­u­als and groups—most of whom are not un­der any pres­sure to act in a so­cially re­spon­si­ble way—will­ing to jump on the op­por­tu­nity. Th­ese peo­ple will undo the good that so­cially con­scious in­vestors are try­ing to do.

There is an im­por­tant dif­fer­ence, there­fore, be­tween di­vest­ment and prod­uct boy­cotts. If a group of peo­ple be­lieves that the Coca- Cola Com­pany is harm­ing the world, whereas Pep­sico isn't, and ac­cord­ingly switch their con­sump­tion from Coke to Pepsi, the Coca- Cola Com­pany is harmed. Their sales de­crease, and they make less profit. By con­trast, if the same group of peo­ple stop in­vest­ing in Coca-cola, and in­vest in­stead in Pepsi, things will quickly bal­ance out, and nei­ther com­pany will no­tice much dif­fer­ence. As soon as an eth­i­cal in­vestor sells a share, a neu­tral or un­eth­i­cal in­vestor will buy it.

This means that di­vest­ment risks be­ing harm­ful. Sev­eral stud­ies have shown that, be­cause of the pres­sure against in­vest­ing in morally du­bi­ous com­pa­nies, “un­ethi-

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